1/18/2010 @ 12:00AM

Fateful Decision

The new year focus is on the economy, but foreign policy will generate big headlines: Israel is going to come to a decision regarding Iran’s getting the bomb. Most Israelis see this as an existential issue. They know their vaunted military can only set back, not eliminate, the Iranian project. Iran’s dictator, Mahmoud Ahmadinejad, is setting up facilities in Venezuela, and who knows where else, to help Iran fulfill its nuclear ambitions. The U.S. State Department and the Pentagon are resigned, as western Europe became long ago, to a nuclear-armed theocratic regime in the Middle East. Russia and China figure the U.S. and Israel will deal with the Iranians, but in the meantime they’ll rake in proceeds from commercial and military contracts. It’s clear to all that the West hasn’t the stomach to impose serious sanctions.

So that leaves two big questions: Will the Israelis strike? And, if they do, what will be the repercussions?

Some experts argue that oil markets will be roiled only in the short term. They figure that since the rest of Iran’s economy is in shambles the Iranians will need the cash they can realize from selling their crude. The U.S. Navy will make sure the Strait of Hormuz remains open if Iran attempts to close it, just as it did in 1987–88, when Iran’s navy tried to attack tankers from Kuwait and Saudi Arabia.

Pessimists argue that economic calculations will go out the window and that the political fallout from an Israeli strike will be substantial and serious. Although Sunni regimes in the region would be quite happy to see Tehran humbled and its ambitions temporary blocked, they are not going to jeopardize their own survival by publicly being anything less than totally outraged. The heavily armed Hezbollah in Lebanon could certainly wreak havoc by firing thousands of rockets into Israel–something that can’t be ruled out, since Iran pays virtually all of Hezbollah’s bills.

The crisis could hit us bloodily: Who knows what sleeper terrorist agents and cells in the U.S. and Europe might do?

Israel is painfully aware that the Obama Administration is adamantly opposed to a strike against Iran, that it wants Jerusalem to stay its hand in the hope that Iran will some day get a regime change. The mullahs are roundly despised by the populace.

Israeli intelligence knows more than any other outside agency just how far along Iran’s nuclear program truly is, particularly since it has a number of agents working on the project inside Iran. Bottom line: Despite the horrific risks, the Netanyahu government will attack if it concludes Iran’s manufacture of a bomb is imminent.

Look for the strike to happen by this fall.

Subpar

Despite all the obstacles, the U.S. economy will grow in 2010. The pace won’t be blistering, but it will certainly be better than what we’ve experienced since the summer of 2008. It’ll be the equivalent of a baseball batter who’s been hitless and suddenly achieves an average of .250–very mediocre, especially considering our economy is capable of batting .400. Whatever growth we manage will be a result of loose money, just as it was in the dreadful 1970s. All of the Administration’s policies–the weak dollar, higher taxes, heavy doses of new regulations–are going to hurt. Thus the expansion will be flimsy and unsustainable.

Though subpar relative to the magnitude of the decline, the growth will nonetheless enable states and municipalities to avoid wholesale defaults and bankruptcies. The one big understated purpose of the President’s bloated stimulus bill of 2009 was precisely to funnel considerable cash to keep states such as California and New York from going under. Given the current mood of the country, Washington will be hard put to pull off a repeat performance. In other words, local governments are finally going to have to engage in very serious belt-tightening. And a handful of states will go to the fiscal wall–California, New York and Michigan, among them. They may not file for bankruptcy, but they’ll undergo the same extraordinary governance that New York City experienced when it went broke in the mid-1970s. A new body will, in effect, dictate what the state can spend.

This will put the focus on the growing and astonishing power of public-sector unions. While fewer than 8% of private workers are organized, nearly 40% of public employees belong to unions. Their overall salaries and benefits have grown exponentially since the 1960s, to the point they meaningfully exceed those of workers in the private sector. And pension plans are abysmally underfunded; California’s plans alone are $63 billion underwater. It’s not uncommon for government workers to retire before the age of 50 with benefits in the six digits. A recent USA Today study discovered that the number of federal workers making $100,000 a year or more has rocketed during the recession–excessive pay now, which means excessive pensions years from now.

These union battles will be unlike those in the private sector, where there is a natural adversarial condition. In government, politicians–who are supposed to be the managers–can be very dependent for their political survival on those unions with which they bargain. This is the reason most politicos cave in during negotiations. Now they won’t be able to.

This Administration is far more ideological and brittle than President Clinton’s government was in the 1990s. Clinton had the flexibility to adjust to adverse political winds. After setbacks in the 1994 congressional elections, he went along with significant welfare reform and reductions in the capital gains tax and exhibited what, by today’s standards, would pass as impressive spending restraint.

President Obama has no such subtle and seemingly laid-back character traits. When things don’t go well, his tendency is to lash out. While the economy will grow, it won’t be vigorous or deep enough to resurrect Obama’s political fortunes. After the 1994 Republican triumph, Clinton was smart enough to let the GOP overplay its hand months later when it came to proposing spending restraints on Medicare. He won a second term.

Even without big Republican gains, Congress is going to be highly reluctant to enact anything close to the President’s hard-left agenda. How will he react? How will he govern?

Worth Their Weight in Gold

End the Fed–by Ron Paul (Grand Central Publishing, $21.99). When it comes to money, the mainstream media like to portray Congressman Ron Paul (Republican–Texas) as a gadfly. Let Federal Reserve Chairman Ben Bernanke enjoy his Time-ly accolades, because history will judge that Paul had it right when it came to the Fed and its often misbegotten monetary policies.

Paul has aroused the fear and ire of the Federal Reserve with his bill calling for the Government Accountability Office to audit the Fed. This tenacious Congressman makes the point that independence should not be confused with a lack of accountability. One doesn’t have to agree with Paul’s ultimate conclusion that the Fed should be done away with to realize that this powerful institution is a kingdom unto itself. The Fed can bring about depressions (many historians agree with Milton Friedman’s belief that the Fed was the chief cause of the Great Depression), horrific periods of inflation, as it caused in the 1970s, as well as the current economic crisis, which the Fed fueled with its excessive easing of monetary policy several years ago. Without the excess liquidity, the housing bubble could never have happened. Yet Congress exercises no oversight of the Fed. In fact, no one outside the Fed has the right to examine to whom it lends money or the agreements it makes with other central banks around the world.

Paul makes the argument that we don’t need the Fed at all, that particularly in this high-tech era we can allow–and efficiently function with–competing currencies. Strange? The U.S. did exactly that for most of its existence, up until the Fed was created in 1913. Needless to say, that part of Paul’s thesis is highly controversial. But what shouldn’t be controversial is his belief that gold should be the ultimate anchor for money. Politicians always end up trashing paper money. Paul correctly hammers home the point that the Federal Reserve’s repeated attempts to smooth business cycles and create perpetual prosperity have backfired badly and destructively. As for the Fed’s ability to manage money, Paul simply notes that since the Fed’s inception the dollar has lost more than 95% of its value.

Churchill–by Paul Johnson (Viking, $24.95). Among Paul Johnson’s many virtues is an unrivaled mastery of the short biography. His character snapshots in such books as Creators: From Chaucer and Dürer to Picasso and
Disney
; Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle; Intellectuals: From Marx and Tolstoy to Sartre and Chomsky are loaded with piercing portraits of noted historical figures. You will learn more from these brief bios than from the usual full-length tomes.

Winston Churchill is one of Johnson’s heroes, and he colorfully encapsulates this outstanding man’s life. He wickedly points out that Churchill inherited his brains and creativity from his American mother’s side of the family, noting that most Churchills were “an unremarkable lot.”

Churchill was amazingly resilient. Johnson describes how the World War I disaster at the Dardanelles, for which Churchill was blamed, could easily have broken a lesser man. In fact, Johnson devotes a chapter to this and other setbacks, entitled “The Lessons of Failure.” In 1936, at age 62, Churchill made a disastrous speech in the House of Commons, regarding the abdication crisis of Edward VIII. “To his obvious dismay, the House reacted with almost unanimous fury. He was first shouted down by MPs, then ruled out of order by the Speaker.” One observer described the scene as “one of the angriest manifestations I have ever heard directed against any man in the House of Commons.” Yet Churchill rebounded from this seemingly fatal humiliation.

The chapter on his wartime prime ministry is the best summary you’ll find of what made Winston Churchill so extraordinary.

Wonderful, inspiring stuff, especially for those being buffeted by the current economic hurricane.